Tailoring your loan term

Posted by  on Jun 03, 2012

Traditionally, fixed-rate mortgage loans have been available for 30 years or 15 years, leaving borrowers who want other loan terms limited to an adjustable rate mortgage (ARM). But many lenders today offer their customers more choices when it comes to a loan term, such as a 10- or 20-year loan -- or even a 40-year option.

The Mortgage Bankers Association (MBA) reported that in 2011 nearly 17 percent of all mortgage refinances were for a loan term other than 15 or 30 years.

Alternate mortgage and refinance terms

While a 30- or 15-year mortgage may work well for many borrowers, if you want to speed up your mortgage repayment and cannot afford the higher payments of a 15-year mortgage loan, a 20-year fixed-rate loan might do the trick. According to The New York Times, 20-year mortgage loans are the third most popular, right behind 30-year and 15-year loans.

If you're interested in a 20-year mortgage loan for your refinance, you can approach your current mortgage lender about this option, though you may also want to contact other mortgage lenders to compare rates and fees.

Ten-year loans may work for you if you have paid off a significant portion of your 30-year mortgage or want to pay off your home before you retire or send your kids to college. Just remember that even with a lower interest rate, your monthly payments when comparing a 30-year home loan to a 10-year home loan will likely be higher.

Finding a lender who offers more unusual loan terms, such as a 17-year mortgage loan or a 22-year mortgage loan, may require more shopping. In addition, you should carefully review the fees and mortgage rates for an alternative mortgage loan because you may be offered the same rates as the nearest standard-term loan, which may not represent much of a deal.

If a lender offers to customize a loan for a higher fee, you may want to consider shopping around more or accepting a traditional mortgage term.

Mortgage loan customization

Another option is "self-customization": You can choose to refinance into the loan with the lowest mortgage rate, provided you can afford the standard payment, and then make extra payments toward your principal either by paying on a bi-weekly basis, adding a little extra to each monthly mortgage payment, or making one extra loan payment each year. You can use a mortgage calculator to estimate how soon you can pay off your loan in full based on your extra payments.

While it can become something of a game to figure out how to reduce your mortgage balance faster, financial experts suggest that you consider your mortgage in the context of your entire financial plan. If you have other debts, it may be best to repay them before your tackle your mortgage. Fully funding your retirement is also important. So no matter what term you choose, make sure your loan payments fit in with all of your financial goals.


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